Rents to Rise, or Home Prices to Fall?

One of the arguments often discussed with respect to the housing bubble is the fact that the ratio of prices to rents has been fairly consistent on a historical basis, but that this ratio has been blown out in the past few years as home prices have shot up. Indeed, this can be seen in the chart below, which compares King County median home prices to annual rents for a typical two-bedroom apartment for the past ~20 years. In this chart, you can see that home prices have typically hovered in the range of 20 to 25 times rent. But since 2001 this ratio has steadily climbed to the point where it stood at 38 times rent at the end of 2006.


The strong historic relationship between rents and home prices is also validated in a recent academic paper on historic price to rent ratios, which shows that on a national basis, the same pattern has existed – with the price:rent ratio averaging about 20x – over the past ~45 years.

More recently, there have been several articles in the local press discussing the rate of rent increases. According to Dupre + Scott, Seattle rents have risen 8.6% in the past year – versus only 2.8% in total for the first six years of the century. Many who are bullish on local housing have commented on this as proof positive that it will be an increase in rents, not a decrease in home values that will bring the relationship back to its historic balance. The argument is basically that rents fallen behind incomes since 2001 – when the local economy slowed and the many people moved away after the dot-com boom. There is some merit to this. Rents have indeed been flat since the start of the new century. On the flip side, home prices have increased so rapidly during the same period it is hard to believe low rents are all of the cause.

So which is it? Rents too low? Home prices too high? Or some combination of both?

Recently, I came across a great data set from Conway Pedersen Economics, Inc, a local economics consulting firm – that provided enough history that I thought it would be possible to run some comparisons on rent increases vs. home prices using local data – and possibly shed further light on what is going on and where we are headed.

My basic premise is that rents and housing prices should track to each other at a fairly consistent ratio over time, but also and more importantly, that the rate of increase in both of these is governed by increases in income over time (as discussed here and here by Tim and myself, and in the aforementioned articles).

Using Conway-Pedersen’s annual data for housing costs and income back to 1985 – we can see that both rents and home prices have indeed closely tracked incomes over this time period. The correlation between the data series is quite strong.


  • Rents and income – as represented by the blue diamonds – have a nearly linear relationship. The correlation between these two time series is about 99%. During the time period for which I have data, incomes rose at a 4.8% CAGR, and rents rose at a 4.2% CAGR. You can see that at the end of the period, the current actual rent level appears to be below the trend line. Using a simple linear regression shows that rents were about 4% under where one might expect them to be based on income growth. But with an 8.6% increase in 2007 (the data only goes to 2006) it’s likely that the same analysis today would show them to be spot on.
  • The story for home prices and income – as represented by the red squares – is similar, but only through 2002. From 1985 to 2001, the time series for income and home prices were also about 99% correlated. As a matter of fact, you can go back to 1970 and find a 99.5% correlation. But in 2002, the two series diverged. Adding the last five years of data (the green triangles) drops the correlation to 97%, as home prices clearly move far above the 1985-2002 trend line. Using the function derived from a linear regression of 1985 to 2001 data to predict where prices should be relative to incomes shows that home prices at the end of 2006 were about 34% above what the long-term relationship would indicate.

So what is one to take away from this? Is it definitive? Hardly. It has all the usual caveats about sample size, my limited grasp of statistics, etc. But it is interesting that we do appear to have had a clear divergence from our long-term “steady state” relationship between housing costs for both rents and home prices.

My thoughts based on this data:

  • Given rent increases in the past year, is likely that rents are now back in line with income levels. Rent increases of ~5% per year are probably to be expected – vs. 2.8% for the first six years of this century. Expecting rent increases that vastly exceed income growth is probably wishful thinking (or paranoia, depending on whether you are writing or receiving checks) as rents have only been greater than +/- 5% of the income-predicted trend line for 2 of 21 years, and then only to the low side (under 8.3% in 1985 and by 6.2% in 1986).
  • The bulk of the diversion from the historical mean in price:rent ratio has been driven by home prices, all of which has occurred in the past 5 years.
  • If rent increases do indeed continue to track incomes at about 5% per year, it will take until 2015 to get back to a price:rent ratio of 25x if home prices just stay flat!

My best guess: we meet in the middle and are back in synch by 2011-12 – which would imply a 12-16% decrease in nominal home prices over the next three or four years.

What do you think? Comment away!

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  1. 1
    Greg M says:

    Slightly off topic, but check out the number of new building permits issued by King County. I believe this is a good forward looking number that will reflect future building pretty well.

    2007 – 1425
    2006 – 1631
    2005 – 1795
    2004 – 2431
    2003 – 2221
    2002 – 2078
    2001 – 1575
    2000 – 1661
    1999 – 2236
    1998 – 2649
    1997 – 2522
    1996 – 1497

    As you can see, fewer building permits were issued in 2007 than any of the previous 9 years. Construction will be very slow around here in the next couple years.

  2. 2
  3. 3
    WestSideBilly says:

    Good article djo. Can you check the link on the second image? It doesn’t bring up the full size version for me.

    I have a really hard time seeing rents straddle the ~50% variance between historical and current rent:own ratios. Landlords typically have a hard time getting much more than a 10% increase in a year, and if they do it every year they lose their tenant(s) because the tenants’ incomes aren’t going up at that pace.

  4. 4
    vboring says:

    rent rates clear according to a market. it doesn’t really matter what people can or can’t afford. if demand is high enough (such as in NY), people accept smaller amounts of space shared with more people for higher prices. if demand is low enough, prices fall until the costs associated with renting the property exceed the income from renting it (such as in parts of Spain right now).

    so, any given market can clear at a wide range of prices almost entirely independent from incomes in the area.

    to find the future rate the market will clear at, you have to look at how supply and demand will change.

    so, how does the rate of increase of supply of housing units relate to the rate of increase of demand for them?

    if we want to believe that rent rates will increase at all, we need to see a contraction of supply vs demand. intuitively, i would guess that the opposite is happening, based on the number of cranes and freshly built townhouses in the city.

  5. 5
    vboring says:

    the situation in parts of Spain is that the income from renting is so low that theoretical rental properties are left empty b/c the income from renting the unit is too low to bother.

  6. 6
    Angie says:

    Happy new year, folks.

    DJO, thanks for another good, crunchy, data-rich article. I second WSBilly’s request for the ability to look at the second graph up close.

    You’ve got home price and income info going back to 1970–I’d be curious to see the rent to price info (first graph) extending back that far, too. That first graph sure looks like it’s got a plateau at 20% that steps up to 23% for a while.

    The $64K (or maybe, given housing prices, $640K) question is whether the next “normal” will be back at a ratio of 23, or at a higher value.

    I’d be willing to bet that if you looked at that historical data for other cities, the price to rent ratio is not perfectly stable over time, world without end, amen. I’d bet it goes up as populations grow and cities get bigger. I’d definitely bet the price to rent ratio is higher in major urban areas than in midsized towns.

    Perhaps not coincidentally, that big step up in the first graph occurred when there was a big wave of people moving to the Seattle area. I came here in 92 and by that time there was a big ball of resentment worked up toward all the people from California who’d flooded the area and driven up housing prices.

    The article you link to summarizes info from the entire US. Useful, but it blurs out the details from place to place. Say what you will about the idea of a “world class city”, but Seattle has definitely grown and changed in the 20 years represented on those graphs. It’d be interesting to see numbers for little towns, midsized burgs, and big cities, and be able to see where Seattle’s data falls in that range.

  7. 7
    Buceri says:

    Talk about jobs and lifestyle. Dave Ross (KIRO) is in Iowa for the caucasses and he just said that there is a sign in a Des Moines condo building where they are selling for $80K. He asked if there was a missing 0.

    So if you think Seattle sucks, there is always Des Moines!!!

  8. 8

    Interesting Analysis DJ! (this kind of stuff is why I read this blog… so hard to find raw data to dig into by yourself)

    It would be interesting to know the historical ratio’s for a few different ‘types’ of cities as Angie suggests. For example: NY, Boston, San Diego and maybe a couple of small and mid sized towns. Most would agree that Seattle has transformed over the past 10-20 years somewhat in step with the growth of MS, Amazon, Costco, Starbuck’s, Boeing ect…all of those companies are #1 or #2 in their industry and they all spawn a 2nd and 3rd tier of businesses that perpetuate the employment growth.

    If you’ve read the book “the Next Great Bubble Boom” (Harry Dent)… his premise has a lot to do with demographics and in particular the movement of wealth that followed along with the Boomer generation. I think the flow of money surrounding the Baby Boomers has more to do with this housing bubble than we have considered so far.

  9. 9
    b says:

    vboring said,
    rent rates clear according to a market. it doesn’t really matter what people can or can’t afford. if demand is high enough (such as in NY), people accept smaller amounts of space shared with more people for higher prices.

    Rents always have to track incomes because you cannot finance your rent like you can a home. In places such as NY, the average salary for the same job compared to Seattle is much higher. People only accept smaller space because, unlike 99% of cities, Manhattan is extremely space limited (unlike Seattle). If you could “correct” for space limitations, I would be willing to bet that a typical rental in Seattle at local wages tracks pretty well with a typical rental in NY at NY wages.

  10. 10
    deejayoh says:

    Fixed the link. sorry about that. Try it again now.

    As to data back to 1970 for the first graph, I haven’t found a source that reports rents back before 1985 – so couldn’t do the ratio. I’d love to be able to look at that longer term as well. I used the 25x calculation for my quick and dirty “reversion” estimate.

  11. 11
    Ray Pepper says:

    Personally speaking all my rentals in North Tacoma which were 1000 have been increased in the last year to 1200..I have rentals in Olympia and Graham that were 700 now 900. (4) In Albany/Turner Oregon from 750 and 890 to 840 and 1100. In Fallon NV (6) 890-1100 now 1000 and 1600. Many Lease options. All mostly new homes. These are the joys of tougher financing. Rentals returns up up up for me personally.

    Ray Pepper

  12. 12
    jon says:

    The ratio of rent to income that is acceptable to an investor is determined by the mortgage interest and expected appreciation.

    The graph that deejayoh shows correlates roughly to the inverse of the 30-year mortgage rate over that time:

    The jump since 2002 started when mortgage rates hit the 6% level.

  13. 13
    Moe Ronn - Realitor says:

    Ray Pepper,
    That’s a very temporary spike in rental rates. As more properties go unsold, and other go into foreclosure, there will be many more vacancies which will turn into rentals BECAUSE NO ONE CAN AFFORD TO BUY THEM. Again, look around Seattle. See the cranes? Have you heard the stories about condos turning into apartments because of NO PRE-SALES? We’ve got thousands of units coming on-line soon. Supply will be high, despire high demand. It will be a wash at best here.

  14. 14
    brettro says:

    Yummy! Nothing starts the day better than a big bowl of Crunchy Data Bits!

  15. 15
    Moe Ronn - Realitor says:

    I’m sure many of you know of Peter Schiff. This is a wonderful debate between a Realtor from CA and him. Within the first 30 seconds you’ll know who’s the analyst and who’s the salesman.

  16. 16
    Cougar says:

    Ouch! I’ve been renting for the last eight years on the Eastside. My current landlord is a private owner, 32 units with full occupancy, no turnover because they don’t price us out. In return, all occupants take pride of ownership and take care of one another. Some tenants have been here 20 plus years.

  17. 17
    deejayoh says:

    Posts on national implications of the price:rent ratio at The Big Picture and at Calculated Risk today, sourcing the U of Wisconsin research and predicting 15% declines. I guess I had great timing for my post, as I had been working this up for a while.

  18. 18

    Moe Ron:

    1000’s of units? seriously THOUSANDS? The number of condo conversions depleted the supply of apartments by 1,000’s over the past 5 years. Also, won’t demand will be increasing in rentals by more than the supply because of the bubble? Most discretionary/ first time buyers are on the sidelines waiting for prices to stabilize so they will remain renters along with the paycheck to paycheck crowd that will always be renters.

  19. 19
    Moe Ronn - Realitor says:

    And many of the condo conversions were not successful, and have reverted back to apts. And, I’m not just talking about Seattle. I’m referring to the entire Puget Sound area. Yes, THOUSANDS! Care to buy a townhouse instead? There’s not quite as many.

  20. 20
    Moe Ronn - Realitor says:

    Also, what do you think will become of all the “investment” units and properties that won’t sell? They become part of rental supply. How many friggin’ times does that point need to be made?

  21. 21
    Moe Ronn - Realitor says:

    With 20% down in 4+ years, I’ll be able to buy a condo now priced at $400K for less than $250K, maybe even lower.

  22. 22

    i think most conversions were successful until maybe a year ago. I do agree there are a lot of units in the pipeline and the ones downtown sure seem to be ‘high end / $450K 1BR’… not sure who is in a position to buy those?

    I’d be interested to know how much the developers costs changed over the past 7 years? If they could sell condos at a profit 7 years ago for $150K and now they are going for $450K, did the cost to build those units go up anywhere near that amount? Or at this point do they look at doing a cash flow analysis and figure that rent in these high end units actually covers their construction costs (it doesn’t need to be the equivalent of a $450K mortgage because they probably built the unit for $225K)… so over the long run, maybe these high end apartments work out to be a better option for the builders (and the renters) ?

  23. 23
    Mark L says:

    If you assume an inflection point ala 1990-ish – i.e. the linear trend takes a permanent adjustment or reset – then that might support a median house price of about $300K (just eye-balling the data). And a median price/annual rent ratio of 30 might be plausible. So a meet-in-the-middle scenario does seem plausible to me. But this also suggests we are looking at about a 20% correction – which wipes out a 25% gain. That would still be only a small portion of the runup since 2000.

  24. 24
    Buceri says:

    When I click on the inventory number; what I am looking at? (last 3 columns). What happened on 1/1/08 at about 3am?
    Thank you

  25. 25
    biliruben says:

    Terrific post, DJ.

    First comment – I would have expected the slopes of the two lines to be similar, and my guess is that they are. Right now it looks as though the median house price is increasing more slowly than rents for a comparable income during your “normal” period, and I think that’s misleading.

    If you were to fiddle a bit with the scale of the y-axes, you can probably correct this. It also may be caused partly by a skewed relationship in 1985.

    Second comment: I think there may actually be 3 or slopes for the median price line – 1997 is where I saw the first elbow, though it isn’t clear from your graph, and may be hidden by the slowdown during the dot-com crash.

    Third comment: It may be that the p/r of 20 during the 80s was due to the hang-over from the hyper-inflationary period. Median price was down, but the monthly payments weren’t because interest rates were so high. My guess is that the ratio was likely closer to 25 in the 70s.

  26. 26
    biliruben says:

    Thought – Maybe use a smoothed curve like lowess or perhaps assume some other non-linear relationship, just to get a feel for the underlying data.

  27. 27
    Moe Ronn - Realitor says:

    It doesn’t matter what it cost to build if they don’t sell them. Eventually, they’ll change hands even if it means a catastophic loss to someone. It’s happening all over this country now. Sure, it won’t be quite a bad here, but it will be bad enough. Or, should I say GOOD ENOUGH ‘o)

    The run up in prices was not based on fundementals, and fundemantals are going to be Gospel to banks from now on. How many people do you know who have $100K+ for down payment?

  28. 28
    WestSideBilly says:

    I’m sure many of you know of Peter Schiff. This is a wonderful debate between a Realtor from CA and him. Within the first 30 seconds you’ll know who’s the analyst and who’s the salesman.

    I feel dumber for listening to that woman talk. Can I have my brain cells back?

  29. 29
    Moe Ronn - Realitor says:

    Thank you!

  30. 30
    Chris says:

    Although it is unclear how much rents will rise or prices will fall, you can still feel comfortable that renting is wiser than purchasing because the renter can always purchase later if it makes financial sense. Consider the two scenarios:

    A. You wait to purchase, but rents rise rapidly, making purchasing cheaper than renting a few years from now. I think this is very unlikely. But if it happens, the renter is no worse off. When purchasing becomes cheaper he or she does so. In the meantime, until purchasing becomes cheaper, the renter was still save money by renting.

    B. Alternately, you purchase now because you saw in the newspaper that rents will rise rapidly. Instead, rents rise modestly while prices decline. You get stuck with both the extra carrying costs vs. renting, and the loss in home value.

    So, renting is currently a dominant strategy. Its better regardless of what happens. If rents rise quickly, renting is better in the short term (until rents rise enough to make purchasing cheaper, at which point you are free to switch). If prices fall, renting is substantially better.

  31. 31
    patient says:

    Nice post! Since we are throwing out wishes mine would be to see a graph that compares median monthly income with the monthly cost of the median home calculated on a 30y fixed with the approximate avg. interest rate on a yearly basis. On the other hand why bother, I think we know the result. A big diversion starting around 2002 as the bubble builds…

  32. 32
    disbelief says:

    Great post DJO! Very professionally done, and worthy of placement in an periodical or investment mag.

    Re: the Fox piece with Peter Schiff and that RE floosie: is this the best that RE bulls can do?! Talk about being out of your league! This is Fox News though, where being loud and obnoxious is a substitute for any subject background/knowledge.

  33. 33
    Bits_of_Real_Panther says:

    Anecdotally, I have a modest house in the Seattle suburbs and recently had to relocate temporarily for work so I found a tenant. Including the tax benefits of holding onto the property I come out even on the rent at recent comparable sale prices. Even within the Seattle area the size of the “Bubble” varies from place to place

  34. 34
    Ben says:

    This is some great analysis – thanks djo.

    One thing that is curious to me is that I remember rents dropping for a couple of years when the bubble was building up steam (around 2001 – 2003). We were renting an apartment in Redmond for $1000, and 18 months later were paying about $200.

    I remember why this was – at the time, buying something the same size basically cost a similar amount of money to renting, so people were buying in troves and the rents dropped to try and make up for that.

    Once affordability dropped I think that rents went back up again. But the graphs don’t show any of this. Maybe I was observing a micro phenonenon and the graph is the macro?

  35. 35
    MisterBubble says:

    I’ve done a number of similar analyses myself, using everything from NWMLS data and moving-averages, to price/rent ratios. And invariably (just like in this example), I’ve found that homes prices are somewhere between 30-40% higher than what would be expected from historical trends.

    The same number always comes up — 30-40% over valued.

    What an amazing coincidence, eh?

  36. 36
    Ben says:

    Oh – and that Realtor ™ in the video. Best quote from her?

    “I am not selling anything”.

    She was rude and interrupted too, and the host encouraged it. Watching Fox always makes me feel frustrated for the poor smart people who have the misfortune to be invited on there.

  37. 37
    TJ_98370 says:

    The WSJ published this article that is remarkably coincidental with DJO’s post.
    Home Prices Must Fall Far To Be In Sync With Rents

    U.S. house prices “likely would have to fall considerably” to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.
    The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly…..

  38. 38
    deejayoh says:

    patient said,

    Nice post! Since we are throwing out wishes mine would be to see a graph that compares median monthly income with the monthly cost of the median home calculated on a 30y fixed with the approximate avg. interest rate on a yearly basis. On the other hand why bother, I think we know the result. A big diversion starting around 2002 as the bubble builds…

    Patient – that is pretty much the analysis I did here – disposable income/Ten-year bond yield compared to home prices. That ratio is a good proxy for the sort of affordability metric you are thinking about – and the results are similar (though the disconnect really starts in ’04)

  39. 39
    uptown says:


    NY has rent control which throws the numbers right out the window; very hard to compare a rent control city to a non-rent control city. SF also has rent control.

  40. 40
    patient says:

    DJ, your the man! That graph does indeed show what I was looking for. It would be a bit quicker for most of us to in interpret and relate to a monthly cost vs. income comparison but your graph does show the disconnect just as well it’s just a tad more complicated. Thanks!

  41. 41
    disbelief says:

    johnnybigspenda said,

    “If you’ve read the book “the Next Great Bubble Boom” (Harry Dent)… his premise has a lot to do with demographics and in particular the movement of wealth that followed along with the Boomer generation. I think the flow of money surrounding the Baby Boomers has more to do with this housing bubble than we have considered so far.”

    If I remember correctly, this idea has been discussed here several times earlier on in this blogs history. I think it’s reasonable to suspect that as the bubble took shape and home prices were on a steep increase from year to year this also drew investments from those folks with a good deal of money to invest – to buy, for example, several investment properties. Certainly this must have appeared to many to be a sure-fire investment.
    But most of the evidence to explain the bubble has pointed to lax standards in financing of home purchases – investment, or otherwise, and it seems likely to me that this lack of prudence / standards on the part of banks also had a big effect on investment purchases. As a result it enabled many such a boomer investor to purchase a considerably greater $ value of property he/she would normally have been able to buy (after all, if it’s a sure-fire thing, why stop at what you can conservatively afford?) As a result stagnating or falling prices will put many of these folks in trouble also.
    Otherwise this would be an argument against increasing foreclosures and losses by banks (as much of the losses would be absorbed by these wealthier investors who paid mostly cash – meaning they loose their investments, and since they were such a considerable part of the cause for the run-up, future foreclosures and bank losses ( and a resulting rapid increase in housing supply) is mitigated – as would be the incentive for banks to revert to very traditional/strict lending standards.
    No I think the reckless financing by banks is the driving factor here, and a slide in in RE values won’t be mitigated much by said boomer investments – just look at the the staggering losses that have been posted by banks.

  42. 42
    DrShort says:

    I think much of the change since early 2000s is the historically low interest rates.

    I bet if you plotted Rent Vs Mortgage payment you’d see less of a difference (but not gone).

  43. 43
    Gabriel says:

    Well, in the last year and a half since my lease expired my the rent for my one bedroom in lower Queen Anne has gone from $750 to $1000/m. I’m thinking about moving to Burien and only paying $400/m for a mother in law unit so I can save for a couple of years and eventually get a house. I sick of throwing my money away on rent. :(

  44. 44
    patient says:

    DrShort, I think you can extract that info from the link posted by deejayoh in the response to my wish. That is if you use the assumption that rents follows income pretty well you can see that if income related to treasury yields vs home prices shows a sharp deviation from the norm from 2004 you will have the same picture with rent vs. mortage payments.

  45. 45
    patient says:

    That is if you use the same mortgage type through time…which as we know do not reflect reality and that is as pointed out here the main reason to the bubble. I.e that mortgage payment were kept on a similar level (temporarily) by the use of exotic loan types. For a short while (2002-2004) lower interest rates did probably offset the raising home prices some what but after that it’s exotic financing and speculation that fueled the bubble.

  46. 46
    jon says:

    The median house price could rise faster than the average rental because people want larger houses out in the burbs. So as usual, you would have to compare cost per square foot.

    In addition, the average rental rate can increase faster than the rate that individual renters see. That is because older, low rent units are torn down and replaced by luxury units.

  47. 47

    There certainly were a ton of older, junky apartment buildings that were converted to condos a few years ago.
    I think that contributed to rents overall going up. Now there seems to be a glut of condos coming on line, and some of them are being rented out instead of sold.
    Nonetheless, the economy here is pretty good and house prices are still pretty insane, and some folks who would have previously qualified for a mortgage are no longer, and then you have a lot of sensible folks who continue to rent instead of buying now cause they don’t
    how far things will fall, so there is still upward pressure on rents.
    So yes, in the near term rents will continue to rise and home prices will continue to fall, and at that point buying will become a lot more appealing,.

  48. 48
    patient says:

    I think it’s obvious to most at this time that Seattle has a housing bubble just like the rest of the country and that it was mainly created by loose credit standards. The need to show the bubble should be getting less for every new data set that is released from the nwmls and case-shiller. From now it’s getting more interresting to predict the pace, duration, magnitude and local differences of the deflation of the bubble. Personally I think the monthly mortgage costs on a traditional loan vs. income needs to return to historic norms to get demand back to match supply and bring back price stability.

  49. 49
    WestSideBilly says:

    I think much of the change since early 2000s is the historically low interest rates.

    I bet if you plotted Rent Vs Mortgage payment you’d see less of a difference (but not gone).

    There was an article, possibly on Calculated Risk, that examined the impact on housing prices when you factored in the exotic loans. It basically showed that the mortgage payment : rent ratio was staying similar but the buying power of the mortgage payment grew exponentially with ARMs, I/Os, and other suicide loans. Not surprising but it was very well done.

    Someone else may recall seeing it… I’m guessing in October or November.

  50. 50
    patient says:

    And to better connect to the post topic, you can’t make people afford to buy a home by raising rents. If you can’t afford it you can’t afford it independent of rental levels…

  51. 51
    B&W Nikes says:

    Awesome research. Curious: would the increase of average square feet in new construction skew the comparison of median home prices to typical two-bedroom apartments some? Also, considering the sharky loan products and culture of the last several years, how do we accurately compare median home price to rent relationships of now to those of twenty years ago? Not only is the historical relationship way out of whack, but how far apart are the numbers in dollars spent per housing unit per month between renting and buying spreading? I imagine they are wider than they have been in our briefly recorded local history. Rents will undoubtedly increase, but people will be very hard pressed to pay very much more than they already are for most of the units they are currently renting, unless there really are helicopters with bags of money leading the fed’s air cavalry.

  52. 52
    disbelief says:

    I’m afraid that rents may well continue to rise somewhat until home prices drop enough to wipe out another year or so of RE gains. It will take a while for people to realize that Seattle was not immune to falling prices, and then they will respond to decreasing home values.
    In the end rents may settle somewhat higher than than they have been in the recent past, but I don’t think they’ll rise near what would be called for by today’s artificially high home prices- that would require rents to double.

  53. 53
    Joel says:

    I think the flow of money surrounding the Baby Boomers has more to do with this housing bubble than we have considered so far.

    Oh yeah, boomers’ “wealth” has a lot to do with the housing bubble, which must be why percent equity dropped by so much during the bubble. They had all this money lying around, but instead using it to pay for their house or buy stuff, they took out huge mortgages and home equity loans. And then when the payments started to go up they used that money they didn’t use before to help go delinquent on their loans in ever increasing numbers.

    I don’t think there is any more money surrounding boomers than any other generation. The national savings rate being negative for the first time would point to vast increase in credit, not real wealth.

  54. 54
    Scotsman says:

    Good stuff- thanks!

    In looking at the data spreads is seems as though housing prices have deviated much further from their expected trend than rents have. While rents may go up a bit to return to the trend line, houses have a long way to fall. Thus I’d have to disagree with your projection of only a 12% drop in nominal prices over the next few years. Inflation won’t be significant enough once the coming recession sinks in to make up the difference. But time will tell, eh?

  55. 55
    b says:

    Joel said,
    I don’t think there is any more money surrounding boomers than any other generation. The national savings rate being negative for the first time would point to vast increase in credit, not real wealth.

    I think this is a big reason why people believe the bubble prices can continue, they are confusing wealth with credit and assume that since they see a lot of wealthy-looking people, there are a lot of wealthy people. The statistics do not bear this out. Your neighbor with two new BMW’s, $800k house and a new boat may be wealthy, but more likely they are drowning in debt and will be bankrupt in a year or two. The credit explosion was not limited just to housing, credit cards and auto/boat loans have also been securitized in a similar way. This is why you started getting 10, 20, 100 credit card offers in the mail every day and no money down, 0% interest car loans in the last several years. I don’t remember getting the flood of offers like that 8-10 years ago, but in the last 2-3 its become ridiculous. People are not wealthier, it was just an illusion until the cards started falling down in August.

  56. 56
    takenroad says:

    Hi Tim, et al,

    One of my theories has been that the tax law change exempting $250k/$500k of cap gains on sale of your home contributed to the run up in real estate prices, and kept stock market returns below what they otherwise would have been. That tax law change happened in ’97, I think. Interesting that the change in slope of the lines on your graphs happens in 2002. Why 2002? Any ideas?

  57. 57
    Matt_in_TX says:

    The inflation adjusted Shiller plots are very striking. Finding some interesting way to plot local inflation adjusted ratios might show a very strong peak in the housing price part of it. As you have plotted the data above, aren’t the slopes we see just inflation (?) until housing rockets up? (If so, the horizontal axis is essentially just time with a few wiggles for inflation variations?)

  58. 58
    b says:

    Interesting that the change in slope of the lines on your graphs happens in 2002. Why 2002? Any ideas?

    The federal funds rate hit a low between 1-1.25 from 2002 to 2003. This started the bubble. It began to run out of steam until Greenspan actively encouraged pushing suicide loans in 2004, which is when the bubble really picked up steam since this wildly increased both the pool of borrowers and the amount of money they could finance. I think the capital gains change is what really spurred the part-time flippers into action and made people see housing as a way to make a quick buck and not a place to live.

  59. 59
    whats my name says:

    Enjoyed your Peter Shiff site. Here is the final paragraph of his Not Your Father’s Deflation article:
    “The big problem politically is that hyper-inflation may superficially appear to be the lesser evil. If asset prices are allowed to collapse, ownership of those assets will pass to our creditors. If instead we repay our debts with debased currency, we retain ownership of our assets and shift the losses to our creditors. Since American debtors can vote in U.S. elections and foreign creditors can not, the choice seems obvious. Of course there are some American creditors as well, but since they comprise such a small percentage of the electorate, my guess is that their losses will be seen as acceptable collateral damage.”

    While I disagree with the characterization of “hyper-inflation” rather than simply high inflation, he lays it out pretty straight and simple.

  60. 60
    whats my name says:

    “One thing that is curious to me is that I remember rents dropping for a couple of years when the bubble was building up steam (around 2001 – 2003). ”

    No bubble here in 01-03 any way you slice it. We lost 80,000 or 100,000 jobs and a like number of population – but no houses. Pure supply and demand issues.

  61. 61
    stephen says:

    In Jan 2006 my rent for a remodeled 2 bedroom apartment in Juanita (Corbella) was $980 and in Feb 2007 they jacked it up to $1305 with a 6 month lease (would not offer a 1 year) and we paid $100 more for month to month. That’s over 30%. It’s just plain BS to claim that decent apartments and houses have only gone up a 8-10 percent over the past 7 years. I’ll grant that many landlords don’t jack rents up as fast for good tenants (although Corbella didn’t give an RA) but rents have gone way up for decent places. There are all kinds of ways this number is mitigated for countywide stats but if you are looking for a decent apt or home you will be paying half again today what you would have paid in 2000.

    Lower than renting, yes but that’s no reason to spin this over and over again.

  62. 62
    stephen says:

    In my last sentence I meant lower than buying :-)

  63. 63
    disbelief says:

    what’s my name,
    so what’s your point about the possibility of hyper (or really high) inflation?

  64. 64

    Joel: maybe you are right. there are only 76 million Americans born between 1946 and 1964, holding 80% of the country’s wealth in that generation. I’m sure that the effect of them selling their stocks for less volatile investments like bonds, and moving from 5000 sqft houses to 3BR condo’s won’t do much over the next 15 years.

  65. 65
    David says:

    Both links found in “(as discussed here and here by Tim and myself,” do not work

  66. 66
    Chris says:

    I am noticing more and more condos for rent on craigslist. I posted one a few days ago, here is another:


    Listed at $300K for 106 days. Redfin doesn’t show a purchase price, so I assume that $300K is pretty close to their break-even sale price.


    Trying to rent it for $1400/month. This one is a lot closer to covering their carrying costs than the last one, but still falls substantially short.

    The cost of capital on the $300K is around $1,800/month. Taxes are around $225. If condo fees and insurance are another $200, then the total carrying cost is around $2,225.

    That means this ‘landlord’ is losing around $825/month, or $10K a year on this property, not including depreciation of the property itself. The market value of the property is somewhere below $300K, or it would have sold by now.

    I find these numbers very interesting. I think we are just starting to see the first wave of condo owners who have been unable to sell at break even, and are discovering that they if they try to rent the place out they will lose money every month. How long can these folks hold out before they pack it in? How will all these condos coming on the rental market impact rents in the area?

  67. 67
    Chris says:

    One other interesting update. I previously posted a property listed on craigslist for rent at $1,650/month. That property was pulled from redfin, but I it has been re-listed here:

    However, the pricing history in redfin appears different. It previously was listed at $529K, with a sale price of $490K in Sept 2005. Now it is listed at $410K with a sale price of $324K in 05. Same pictures, so I am not sure why the numbers/sales history would change that way.

    Cost of capital on a $324K loan would be around $2K/month, and with taxes, insurance, and condo fees, the $1650/month rental still generates a loss of at least $800/month. The $410K listing has been active for 35 days, it will be interesting to see what happens.

  68. 68
  69. 69
    Bits_of_Real_Panther says:

    There is no doubt that buying a home this year will not be a wise financial decision, the smug renter is now hoping for a pullback to local 2002-3 prices so that “I told you so” has some meat on it. If there is a pullback only to 2004-5 prices everyone who bought before then or got a decent deal at that time is still sitting on a pile of equity even with an 80/10 and “I told you so” doesn’t mean so much

    Old-timers always say it’s all about jobs so if you want that house at 2002 price levels you want to see some big unemployment numbers in the next few quarters but if 7-8% unemployment happens you might want to double-check the quality of the neighborhood before you sign

  70. 70
    Bits_of_Real_Panther says:

    In other words I believe the smug renter needs to start thinking about the be-careful-what-you-wish-for angle

  71. 71
    jane says:

    We looked at condo for rent for $1900, sale price is $550k, HOA $500. Seems like a good deal… but worried that if they are losing money, the condo may get foreclosed… and we will have to move again and lose our deposit($2400).

  72. 72
    jon says:

    “the smug renter is now hoping for a pullback to local 2002-3 prices so that “I told you so” has some meat on it.”

    I checked and it says:


  73. 73
    cow cat says:

    Nice analysis of the ratio trends, DJO.

    However, your extrapolations seem to rest on income growth remaining constant: If so, rents rise.

    But, I remember after the tech bust that the tight rental market loosened up, and there were reductions in rent all over the city.

    That is, IF we start encountering significant job losses again — certainly conceivable in a credit-crunch, post-bubble world — rents may fall as well, meaning home prices will have to fall even further to reach historical balance.

    Hold on to your hats, folks!

  74. 74
    Geode says:

    Is there an analysis of this sort for Pierce County that anyone knows of?

  75. 75
    deejayoh says:

    Geode – there is data for Pierce County in the forecast tables from Conway Pedersen – so it would be pretty trivial to duplicate this if you are reasonably excel savvy

  76. 76

    […] vs. Prices.  This has long been stated (Seattlebubble post on the topic) as a reason for the decline of civilization (or “too […]

  77. 77
    Jeremy Leipzig says:

    This is one of the only blogs to really look into this issue.
    The Davis paper uses house price instead of average mortgage payment, which means mortgage rates play no role in his model of housing risk premium.
    If the historical average 30-year mortgage rate is 8% and the historical average price-rent ratio is 5%
    In 2006 the price-rent ratio was 3.5% (30% below average) and mortgage rates were 5.5% (31% below average).
    As the rates rise, I would not be surprised to see housing prices fall and rents climb at a similar pace.

  78. 78
  79. 79
    czb says:

    Jon @ 1:29PM Jan 6 ’08

    Just curious. If you’re still out there – A mere one year later, do you still think prices will not reach 2003 levels?

  80. 80
    bitterowner says:

    sorry – that was me above

  81. 81
    bitterowner says:

    One more try – there seem to be technical issues with getting the right name

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